A trust fund is a good way of safeguarding children's economic wellbeing in case of their parents' death, without giving them free rein with their inheritance, writes Laura Slattery.

Keeping money tied up in trusts might sound like something wealthy people do to minimise their tax, and it can be.

But, as far as the passing of assets to children is concerned, trust funds are not just seven-figure sums that spoiled, second-generation teenagers can look forward to getting their hands on. Most parents will also set up a form of trust in their will if they have children who are under the age of 18.

A trust will safeguard children's financial futures in the event that both parents die at the same time. Where substantial sums of money are involved, prudent parents can also use trusts to limit their children's control over assets such as property until they feel they are mature enough - that doesn't necessarily have to be the day they turn 18. In fact, delaying inheritance is now seen as the more sensible option, sometimes even to the point where it becomes tax-inefficient to do so.

"When dealing with a child who is under 18 years of age, it is good practice when making your will to set up a trust for the child," says Mr Richard Grogan, a solicitor at O'Flynn Exhams & Partners and a committee member of the Society of Trust and Estate Practitioners (STEP).

"If properly set up, the trust should be able to deal with issues relating to the care, maintenance and education of the child. And if you have a child who is incapable of managing their own affairs, it is imperative that a trust is set up for that child."

Under a trust, the ultimate beneficiary does not have control of it until they reach a certain age. Until that time, control over the assets held in trust rests with a number of trustees, usually two or three. Selecting who will be the trustees and ensuring those trustees have full power to deal with the assets are two of the most important considerations to make when setting up a trust, according to legal advisers in the field.

If you are asked to be a trustee, it is not something you should take on lightly, according to Mr Grogan.

"It is important that trustees obtain professional legal advice as to their duties, powers and responsibility. There are onerous responsibilities for being a trustee," he says.

"In the past, trustees have been sued by relatives when they attained their majority because of some oversight."

The age of majority is 18, but many parents are deciding that this is too young an age for offspring to inherit and control wealth built up by previous generations, especially if the trust is set up outside the context of a will for tax-planning purposes.

High net-worth individuals may wish to pass on assets to children at an early age in order to crystallise the value of the gift on that date and pay a smaller amount of capital gains tax, rather than leave it under a will and see the asset valued on the date of execution. The asset, particularly if it is property, might then attract a higher tax bill if gift or inheritance tax thresholds are crossed.

But at the same time, these parents may want their kids to "do it the hard way", which in reality means having to earn money in their own right, just like everybody else. Even people with a more typical set of assets to their name - a house, death-in-service benefits under their pension and perhaps a modest life assurance policy - might be afraid that their kids would not be mature enough at 18 to handle such an inheritance appropriately if left to their own devices.

It is quite common to draft a trust so that it remains in place until children are 21 or even older, notes Mr John Jermyn, a partner at Cork-based law firm, Ronan Daly Jermyn. "It's not so much a protection of the wealth, but a protection of the child should the disaster situation occur," he says.

There is no harm in being cautious when it comes to picking the right age, agrees Mr Paraic Madigan, a partner at Matheson Ormsby Prentice law firm and also a committee member of STEP. "What I generally advise parents is to be reasonably conservative in choosing a date. If they pick the age of 25 and within the trust mechanism there is power to advance capital at an earlier age, they can have the best of both worlds," he says.

In other words, the person who sets up the trust can give guidance to trustees in a letter of wishes, specifying that they provide the beneficiary with a basic income until a certain time rather than releasing the entire trust at 18. If there is more than one child and more than one beneficiary, they may also indicate that they wish the property to be retained until the youngest child has finished his or her education.

If the children are still at primary-school or pre-school age at the time a will is being made, parents may opt for a discretionary trust, which gives trustees greater powers about when, how and which children will benefit.

For example, if one child later becomes addicted to alcohol or narcotics, the trustees may decide to limit the flow of cash to them until they agree to seek help.

If the assets include ownership of the family business, a discretionary trust can help parents circumnavigate the problem of deciding which of their toddler children is likely to have the most aptitude, or interest, in taking over.

"A letter of wishes may indicate a preference for ownership to pass to children who are involved in the business and non-business assets to pass to children who are not involved," Mr Madigan explains.

With discretionary trusts, holding assets in trust past the age of 21 can have tax disadvantages. If the trust is kept in place after all potential beneficiaries pass this age, it is subject to a once-off discretionary trust tax of 6 per cent of its value and an annual levy of 1 per cent thereafter.

STEP has proposed raising the age exemption on this tax to 25, to take into account parents who wish, for good estate-management reasons, to delay inheritance.

"It is possible to avoid this charge if a child has an interest in possession," says Mr Grogan.

"This is a legal concept, where particular legal advice would be required, but it is quite commonplace. For example, this would include a child who is given a right to live in the property, although there are other tax consequences for this."

The expense of holding assets in trust for long periods of time means you would only do so in order to defer a more significant tax, such as gift or inheritance tax, according to Mr Madigan. For example, business assets could be held in trust despite the discretionary trust tax in order to qualify for business relief on gift or inheritance tax when it comes out of trust.

"It may be necessary to reconstruct the business," Mr Madigan says. "The trust can give you time to do this."